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Insurance: Why does it cost so much? Part 1

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Max Dopazo

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Simple question that has a lot of answers.

Because the development of premium (or figuring out how much insurance costs) is very different in commercial situations than it is in personal, I am splitting it in two.

Today we tackle commercial.

To speak in generalities, I’m also breaking commercial insurance into two parts Liability and Property.


For liability insurance there are 5 different “exposure basis” (fancy name for type of info used to get to a premium).

Gross sales

The most popular of them used is Gross Sales. Basically if your business sells something tangible the carriers use Gross Sales because the more you sell the more possibility there is for a claim. This is true for retail store insurance, clothing stores, electronics store, manufacturers or distributors.


This is often used when the business performs a service, usually at someone other than their premises. The idea being that the biggest loss would likely come an employee at a customers location. As examples insurance for plumbers, tree trimmers, electricians and inspectors.


Used for businesses that have a likelihood of having a loss because of a location they own or occupy. For instance, landlords, building insurance, medical office insurance, travel agency , accountants, insurance agencies.


Units is a little less uniform. It’s used for businesses that have a group of something that are the primary source of claims. For instance, Apartment building insurance is rated on the number of living units. Another example is Daycare insurance which is based on the number of children it is licensed to take care of. The same is true for a School and adult day care.

Total cost

Last but not least, total cost is usually used for businesses that don’t have a primary relationship with their most likely claim source. Usually this if for contractor/subcontractor relationships where the subcontractor costs are treated similarly to the way payroll is on the contractors policy.


With property insurance the biggest factor is the limit of coverage. Basically the more expensive the building is to replace the more expensive the premium will be. Other factors do weigh in heavily in pricing like location or the possibility of catastrophic losses (e.g. hurricanes, earthquakes), but overall the driving factor is the amount of limit you need to purchase.

In Part 2 I discuss what affects homeowners, personal auto and umbrella premiums.

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